Financial Freedom Without Budgeting

More Money, Less Budgeting

Imagine a world without budgeting, a fixed savings rate, lifestyle creep, busywork of transferring investment money, or having to make decisions based on money. Imagine an automatic path to financial independence. That is the world I live in and I’m inviting you to join me.

I have never budgeted or had a fixed savings rate. I never reduced my spending or lifestyle despite two very large voluntary pay cuts when moving practices. How did I pull this off? Keep reading my friend.

Monthly Cash Burn Rate

Although I never followed a budget, I did need to figure out how much I spend. I pulled my checks and bills and credit cards for a month or two and estimated my Monthly Cash Burn Rate. What is the typical amount of money that my family and I spend each month?

The rest of my non-budgeting method involves adjusting for periodic expenses. Those include semiannual property taxes, semiannual disability premiums, annual car registration, and annual homeowners’ insurance. The big optional stuff is in that category too like our new hardwoods and our trips to China, South Korea, and Ireland.

So, let’s say my routine wants and needs are covered by $6K per month and my periodic expenses plus vacations and home upgrades cost $12K every six months. Those periodic expenses are equivalent to $2K per month. So, I will need $8K per month, $6K of which can go to checking and $2K to savings. The rest will be invested. The savings account serves as a temporary holding area for money that will be spent during the year.

Automate Your Savings

The idea of pay yourself first is to automate your savings. Make your “purse fatten” by adding to that first and then living off the rest. It is a solid plan, especially for those who aren’t natural savers and who tend to spend every penny in their hot little hands.

Normally, people pay all their bills after their paycheck comes in. Then they pay for the fun stuff they want. There are no “leftover” or “excess” funds that can then go to a retirement account or for long-term savings. This results in a low or negative savings rate across America. That habit also explains why 45% of physicians feel they cannot afford to max out workplace retirement savings plans. They don’t see any money left over after they covered their other needs and wants.

The key to implementing this idea is to request money be electronically sent to a separate account for savings and investments.

Richest Doctor in Babylon

The 10% that is recommended in The Richest Man in Babylon is more than the average American saves. Nevertheless, 10% is likely a bare minimum. It may lead to a subsistence level retirement after 40 years of work.

So, the method is fine, but 10% is too low. The rate is within our control and is the surest way to shorten the time to financial independence.

Rather than pick a fixed savings rate and follow a budget, I send myself a falsely low “paycheck.” I created an economic scarcity. Mind you, I set my “paycheck” at a comfortable level. I made sure it would cover all my family’s needs and most of their wants. As my income grew and my student loans were paid off, I found it easy to divert more money into my taxable accounts. Also, any bonus money, dividends, or other investment payoffs went into investment accounts. This method worked well for us without needing to obsess over a budget. No busywork. No sacrifice or sense of deprivation.

Looking back, I averaged a savings rate of about 38% of gross income and achieved FI (Financial Independence) after fifteen years at the age of 46. A 38% percent gross savings rate works out to about a 50% net savings rate. That has been shown to allow FI by 17 years.

Many stressful occupations like military, police, and firefighters encourage their members to retire after 20 years. There is a reason for that. The physical, mental, and psychological stress can wear people down. That may happen to you too. I felt the effects of cumulative stress and sleep deprivation after 20 years of clinical practice. Wouldn’t it be good to have options if that happens to you? If you no longer must depend on your job for the money you could cut back, go part-time, take a sabbatical, or retire early.

Pay Yourself Last

I have previously (in a guest post for Physician on Fire) referred to this as the “Pay Yourself Last” method. I’m recommending it to you here. Don’t set a savings rate and spend the rest. Set a monthly spending amount and invest all the rest. The percentage may go up or down depending on a dozen factors, but you will automatically grow your wealth. You will also have a system for guarding against a common threat to early retirement: lifestyle creep.

Before setting this up I struggled to automate my savings. I was never sure what savings rate I should set. My check and savings seemed to change almost monthly. There would be a CME reimbursement on one check. I would reach the max for my 401K or 457 and those contributions would stop. I would get a bonus or a raise. It didn’t make sense to have the same percentage of all that goes to investing. Also, if I got a lot of extra money in a check for some reason and I didn’t need the money I would have to write a check or transfer that into an investment fund. Or it would be easy to spend.

Anatomy of a Paycheck

Some readers enjoy seeing specific examples and numbers rather than just concepts. For them, I will add some detail. Let’s say I’m a 31-year-old doctor just starting out. The average compensation is now around $300K per year. I lived on $60K during residency but am looking forward to a pay raise as an attending. My goal is to be financially independent by age 48. To reach that goal I set up my investments in both taxable and tax-advantaged accounts.

I would set up my electronic transfers for direct deposits from my employer.

My “paycheck” in my checking account is for my routine expenses and short-term wants. I also have some money sent to a “savings” account for periodic expenses like property taxes, vacations, disability insurance

All the rest goes into investment accounts.

It would look something like this assuming I’m paid every other week.

To execute this in payroll I would have them send $3K per pay to my checking account, $1K to my savings account, and any remaining net pay to my investment account. In this example, the extra investment amount is $2,814 but that may vary wildly during the year and over time. The “paychecks” to checking and savings remain rock-steady.

Fixed Paycheck, Variable Investing

The percentage savings may vary depending on my salary, productivity, contract, incentives, tax rates. Those factors seem to be in constant flux. This method makes my cash flow smooth. Also, if I get a raise, there is no temptation to spend that extra money since I never see it.

This “Pay Yourself Last” method works great for me, and I think it would help others. You don’t have to spend time budgeting.

Now that I have been financially independent for several years, my income has grown. My spending has not increased, so my gross savings rate has slowly crept up over 40% without me doing anything differently. I love how the increased savings requires no action on my part.

What about you? Have you heard of this before? Is this how you manage your cash flow and investment?

Very smart TNL! That should work great! I was over for dinner at a partner’s house. I asked him and his wife how they handle the bonuses. They said they alternate. The last one was his and he bought a motorcycle. The next one will be hers and she has some shopping sprees planned. I like your method better than theirs.

I used your method of establishing a reasonable spending rate and saving the rest. It made me wealthy and financially independent by age 50. When I do a one on one financial makeover, many of those doctors do not want to budget. For them, we go through the process of budgeting so we can establish what they are currently spending (they usually have no idea what they are spending). Then we can make changes to get a better spending rate and establish how much money is available for investing and paying off debt. Once those numbers are established, you need only set up the investments to be automatic and make the established debt payment. The rest of the money can be spent without using a budget.

Thanks, Cory, It sounds like you and I followed a similar path. Get rid of debt ASAP. Spend a reasonable amount. Invest the rest. Buy into a business or real estate that you know well. Reinvest the profits. Then at 50, you have options such as cutting back or changing careers. Love it. The clients you work with are lucky to have an experienced advisor to guide them.

Nice examples of how you can build wealth without a budget. I hate to admit it, especially since I have had a post telling people they need to budget, but I have really never felt the need to budget either.

I am a naturally spend below my means type of person. I have a bi-monthly paycheck which adds a substantial infusion of cash into my checking account. I pay off all the credit card balances (i.e. 2x a month I pay it down to 0), then I settle all my recurring expenses (really very minimal since I am debt free) and then keep $2k in my checking and transfer the rest into my savings account ready to deploy to whatever investment I see fit.

As your assets grow, there is even more cash infusion from other sources (i.e. my favorite kind of money (passive income)) and that turbocharges my savings rate even more (I believe the past 3 years for example I have had over 70% savings rate).

Thanks for sharing (& confessing!) Xrayvsn, It sounds like you have a system that works for you. I like to avoid the whole “transfer the rest into my savings account” part. The less I have to do the better. I agree that the wealth and savings accumulate fast when you have a high income, no debt, and passive income streams. A few years of relative sacrifices pay huge dividends later in life.

Great post! I think in fields that have higher burnout, like emergency medicine, it is even more prudent to get the hell out of clinical practice LOL- or at least be FI so there are other options and you can scale down if you need to.

My husband and I don’t budget either, but we pay into our joint account each month to use for our family spending.

Thanks for the comment, GYM. It is good to know there are others out there who have a system that works well without the painful budgeting process. After 15 – 20 years in a stressful career, most would be happy to be FI and have a few more options and fewer financial pressures. ER is an especially good field for benefitting from FI. It seems more common (at least in the U.S.) for ER doctors to have the option of reducing their numbers of shifts per month. Cutting back is possible in almost any career or specialty but some are harder than others.

Thanks, TPP. I know I’m not the only one out there who has done it this way, but I really don’t seem to read about it much. I still struggle to explain it well, but I must have gotten closer this time based on the positive feedback I have gotten so far.

I just want to give hope to those who beat themselves up when they don’t “budget” or don’t have a lot of time to manage their money. That is ok. Just make a few good choices early on, set up automatic deposits, and you are good to go.

Great article. I do find it very difficult to maintain a budget every month. The brutal reality is that willpower is limited! I do allocate a certain sum from my paycheck every month. What you don’t see you won’t spend! And I find it helpful using a mobile app to track my expenses too.Desmond Mar recently posted…Should You Buy a New or Used Car?

Good for you Desmond. It sounds like you have a system that works. In theory, I like the idea of budgeting. In reality, I hate it and don’t do it. Fortunately, I have a system to save and invest consistently. That combined with our frugality and debt aversion has served us well over the years.

Generally, we always tend to think about what we will do in our lives next weekend, next month, or maybe next year. We might even make plans for celebrations like a vacation, or a wedding in the family, or son’s/daughter’s graduation day party. But, we often forget about our financial freedom and avoid financial planning for future goals.

So True Valenica! It is hard to plan way ahead. We have enough to do right now. Plus who knows what the future holds? And it is difficult and maybe painful to think about sacrifices now for a better future. The easiest path is to just not do it. The easy path is unfortunately the most commonly chosen path too.

Excellent idea WealthyDoc. I think I may have to adopt this style. What I’ve been doing is pretty much track everything, so not necessarily budgeting but it helps me get an idea of what we spend on every category all year round. I just carve out what to save every month, take that out first, then spend whatever that’s left. I think your method is a lot more superior. By the way, I love your style of writing…simple, short and easy to read. I’m subscribing!

If you have a budgeting system that works I would stick with it. Sometimes I wish I were more detail oriented, especially with the flow of money in and out of my house. I couldn’t seem to manage it on a consistent basis though. And it drove my wife nuts too.

Now we just set our spending level and invest the rest. It is a subtle difference and yet it is a huge difference. I have called it the “pay yourself last” method in my post for PoF. I think it helps keep lifestyle inflation in check and it maximizes investing unexpected cash like bonuses or raises.

Awesome post. I love the monthly cash burn rate technique. Strict budgeting is not for everyone especially if you are a natural minimalist. Growing up in Nigeria, I learned how to save money, although not by choice. You can not guarantee what will happen tomorrow, so I earned to save what I have today as if I might not have any money tomorrow. Some might call it scarcity mentality but the struggle was real.

I gotta say though, that you still follow some form of budgeting. Budgeting does not have to be the fixed pen and paper or track every little penny. For example, you have an idea of how much you spend monthly and you adjust it as you go. This is essentially the basics of budgeting. We have also transitioned to reverse budgeting in that we basically transfer everything from the joint account to invest or save and leave just 5,000 dollars which we spend monthly. This is also an example of paying yourself first principle.

I guess if budgeting is defined very loosely then I have a budget. It doesn’t seem like one though. We don’t have categories or anything in writing. I don’t know what my wife charged on her credit card. I don’t know how much we spent on kids’ activities, clothing, entertainment, or food. I don’t know or care whether any of those are going up or down. We aren’t trying to cut back, save more, or meet some spending target. We don’t have budget meetings or discussions.

Yet we went from poor to some version of “Rich.” or at least FI. We did a spot check on spending for a month or two many, many years ago. Then I set an annual cap on spending. That amount comes into our checking account. That is what we spend. No more, no less. It is easy and works for us. I realize it isn’t for everyone.